Uberization Effects on Freight Procurement
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Uberization Effects on Freight Procurement by Ignacio Helguera Sánchez Bachelor of Science, Industrial Engineering, Universidad Pontificia Comillas, 2009 and Lydia Paramita Hendra Mukti Bachelor of Science in Business, Finance and Operations Management, Indiana University Bloomington, 2011 SUBMITTED TO THE PROGRAM IN SUPPLY CHAIN MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF APPLIED SCIENCE IN SUPPLY CHAIN MANAGEMENT AT THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY JUNE 2018 © 2018 Ignacio Helguera Sánchez and Lydia Paramita Hendra Mukti. All rights reserved. The authors hereby grant to MIT permission to reproduce and to distribute publicly paper and electronic copies of this capstone document in whole or in part in any medium now known or hereafter created. Signature of Author...................................................................................................................... Ignacio Helguera Sánchez Department of Supply Chain Management May 11, 2018 Signature of Author...................................................................................................................... Lydia Paramita Hendra Mukti Department of Supply Chain Management May 11, 2018 Certified by................................................................................................................................... Dr. Christopher Mejía Argueta Director, Supply Chain and Global Logistics Excellence Network for Latin America Capstone Supervisor Accepted by.................................................................................................................................. Dr. Yossi Sheffi Director, Center for Transportation and Logistics Elisha Gray II Professor of Engineering Systems Professor, Civil and Environmental Engineering i Uberization Effects on Freight Procurement by Ignacio Helguera Sánchez and Lydia Paramita Hendra Mukti Submitted to the Program in Supply Chain Management on May 11, 2018 in Partial Fulfillment of the Requirements for the Degree of Master of Applied Science in Supply Chain Management ABSTRACT According to a report by A. T. Kearney, in 2016 the US business spent $1,392.64B on logistics costs. 90% of transportation spending is procured in the form of Long Term Contracts. A Long Term Contract drives long procurement cycles that can last over 6 months, which results in significant financial risk for both shippers and carriers. It is estimated that 10% of freight under Long Term Contracts fall out and ends up in the spot market due to low tender acceptance and market volatility. The spot market, on the other hand, can be highly dynamic. Typically, shipper pays 20% more for freight in spot market compared to what would be agreed upon in a Long Term Contract. Regardless of the freight procurement method, shippers are constantly faced with market volatility and are left scrambling to find a new carrier capacity when carrier fall off occurs. Assuming a shipper could book a truck instantly, how would their procurement strategy and supply chain network change? We hypothesized that there is a financial benefit to all parties from faster, more liquid transportation transactions, through lower labor costs spent on freight procurement transaction and shorter planning cycles in transportation procurement. Digital freight matching via an on-demand app, facilitates long arduous transactions in a real- time low-cost manner. Using System Dynamics models, this project developed a behaviorally based conceptual model to analyze effects of a digital freight matching app on shippers’ freight procurement. Our analysis shows the shipper will choose a more efficient, low-cost alternative to the spot market, provided that the shipper’s total spending is lower than what would be agreed upon in a Long-Term Contract. Digital freight matching benefits shippers by providing needed freight capacity at lower cost. Individual changes in market volatility, shipper volatility, app efficiencies, or carrier and shipper adoption rates would potentially add more than 10% variability in freight rate paid by shipper and more than 50% digital freight matching app adoption rate for both shippers and carriers. Capstone Supervisor: Dr. Christopher Mejía Argueta Title: Director, Supply Chain and Global Logistics Excellence Network for Latin America ii Contents 1. Introduction ........................................................................................................................ 1 2. Literature Review............................................................................................................... 6 2.1. Long Term Contract vs. Spot Market.......................................................................... 6 2.2. Market Liquidity ......................................................................................................... 7 2.3. Digital Freight Matching ............................................................................................. 7 2.4. Spot Market Provides Increased Social Surplus ......................................................... 8 2.5. System Dynamics ........................................................................................................ 8 3. Methodology .................................................................................................................... 10 3.1. Qualitative Research on Freight Procurement .......................................................... 10 3.2. System Dynamics Modelling .................................................................................... 10 3.3. System Dynamics Variables...................................................................................... 12 3.4. Variable Equation ...................................................................................................... 17 RFQ process time ............................................................................................... 17 Administrative cost ............................................................................................ 18 Routing Guide Failure Cost ............................................................................... 18 Shipper Bargaining Power ................................................................................. 18 Price in LTC ....................................................................................................... 19 Price in Spot Market .......................................................................................... 19 Average Total price in Long Term-Spot Process .............................................. 19 Price in Uber Freight .......................................................................................... 19 Liquidity Rate .................................................................................................... 20 Freight Match ................................................................................................. 20 Market attractiveness for carriers ................................................................... 20 Relative price in Long Term Contract............................................................ 21 Market Attractiveness for shippers ................................................................ 21 Shipper adoption rate ..................................................................................... 21 Carrier adoption rate....................................................................................... 21 3.5. Dynamic Hypothesis ................................................................................................. 21 Shipper Density in UF ....................................................................................... 22 Carrier Density in UF......................................................................................... 22 Shipper Density in LTC ..................................................................................... 23 4. System Dynamics Simulation and Analysis .................................................................... 24 4.1. Inefficiencies in the process ...................................................................................... 24 4.2. Tender Acceptance .................................................................................................... 25 4.3. Bargaining Power ...................................................................................................... 26 4.4. Digital Freight Matching Adoption ........................................................................... 26 iii 4.5. Market Saturation ...................................................................................................... 27 4.6. Liquidity .................................................................................................................... 28 4.7. Sensitivity and Scenario Analysis ............................................................................. 28 Market Volatility ................................................................................................ 29 App Efficiency ................................................................................................... 31 Average time to adopt UF for shippers .............................................................. 32 Average time to adopt UF for a carrier .............................................................. 34 Shipper Volatility Profile ................................................................................... 34 4.8. Results ......................................................................................................................